German Economy Grows By Ignoring the Neo-Keynesian Meddlers

From Germany comes news of a remarkable resurgence.

BERLIN – The government on Friday announced quarter-on-quarter economic growth of 2.2 percent, Germany’s best performance since reunification 20 years ago – and equivalent to a nearly 9 percent annual rate if growth were that robust all year.

The strong growth figures will also bolster the conviction here that German workers and companies in recent years made the short-term sacrifices necessary for long-term success that Germany’s European partners did not. And it will reinforce the widespread conviction among policy makers that they handled the financial crisis and the painful recession that followed it far better than the United States, which, they never hesitate to remind, brought the world into this crisis.

A vast expansion of a program paying to keep workers employed, rather than dealing with them once they lost their jobs, was the most direct step taken in the heat of the crisis. But the roots of Germany’s export-driven success reach back to the painful restructuring under the previous government of Chancellor Gerhard Schröder.

By paring unemployment benefits, easing rules for hiring and firing, and management and labor’s working together to keep a lid on wages, Germany ensured that it could again export its way to growth with competitive, nimble companies producing the cars and machine tools the world’s economies – emerging and developed alike – demanded.

Germans steered clear of the debt-fueled consumption boom that many believe contributed to the financial crisis. During the recession, Chancellor Angela Merkel resisted the palliative of government spending that the United States and some European partners felt was crucial to restoring growth.

As the latest numbers show, Germany is outproducing its neighbors by wider and wider margins, raising fears of a two-speed Europe that could render the common regional currency unstable.

France’s economy grew at just a small fraction of Germany’s, 0.6 percent in the second quarter. Spain’s economy grew an anemic 0.2 percent, while Greece’s shrank 1.5 percent.

How do you like those Germans? They ignore Tim Geithner, Martin Wolf, Paul Krugman and all the other neo-Keynesian meddlers and know-it-alls. Instead, they stick to the basics. They encourage work and productivity. And now, wouldn’t you know it? The Teuton ants are taking market share from their grasshopper competitors.

You remember how Wolf, et al, told the Germans not to work so hard? Angela Merkel was urged to raise wages in Germany…and boost spending. Germans were said to be producing too much, working too hard, and goofing off too little.

“You should be more like us,” said the Anglo-Saxons. Fortunately Merkel had the good sense to ignore them.

Does that mean, the crisis is over for the Germans? Have they found a way make the welfare state work?

Maybe. There’s no doubt that they are on a better road than the US, France and Britain. But there are bound to be some potholes.

Bill Bonner
for The Daily Reckoning

The Daily Reckoning